A no-deal Brexit could push the UK’s debt to its highest since the mid-1960s, the Institute for Fiscal Studies says.
In its latest Green Budget report, it states that even “under a relatively benign” scenario, a no-deal Brexit would be “economically considerably worse”. It says it could implement further fiscal loosening totalling 2 per cent of GDP. It predicts interest rates cut to zero alongside £50bn of quantitative easing, while overall the economy does not grow over the next two years – then growing by just 1.1 per cent in 2022, leaving it 2 per cent smaller than our current level.
The report looks into different scenarios, stating that securing a deal would be better for the economy over the next two to three years than another delay, but revoking Article 50 would “lead to the best economic outcome”. It says if the government secured a deal, it could come with tax cuts and further spending increases together worth 1 to 1.5 per cent of GDP then should pick up to 1.5 per cent a year in the short term. “Some pent-up investment should occur, and consumer confidence would improve, as the risk of a no-deal Brexit recedes.”
Revoking Brexit would require a Labour-led government, the IFS says, which would implement tax and spending increases. But it says interest rates would rise more quickly, resulting in a growth of 2 per cent a year.
IFS director Paul Johnson says: “Given the extraordinary level of uncertainty and risks facing the economy and public finances, [the government] should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget.
“In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy.”
A spokesperson from HM Treasury says: “September’s spending round supported the people’s priorities of health, education and the police within the existing fiscal rules, as we said it would be.
“Beyond that, the chancellor has already said that we will be reviewing the fiscal framework as we turn the page on austerity. In so doing, we will retain a fiscal anchor to public spending so that decisions are taken with a view to the long-term sustainability of the public finances.”